ECON7400 – economies of scale

Subject: Economics    / General Economics
ECON7400 Tutorial 1
March 4, 2017

1. In the very short run, practically all inputs and hence all costs are xed. (e.g. In a single day, can a
rm change the number of workers it employs?) Does this mean that the marginal cost is zero in the
very short run?
2. If there are economies of scale for all possible output levels, such that the rm’s average total cost
declines the more it produces, can a price equal to marginal cost ever result in a prot for the rm?
3. Suppose the cost of producing QCar cars and QT ruck trucks is
T C(QCar , QT ruck ) = 10000 + 70QCar + 80QT ruck . (a) Calculate the marginal cost of cars. (Hint: What is the cost of producing an additional car, holding
the number of trucks constant?)
(b) Calculate the measure of scope economies when QCar = 100 and QT ruck = 200.
4. Suppose a competitive market consists of identical rms with a constant long-run marginal cost of $10.
Suppose the demand curve at any price, p, is given by
QD (p) = 1000 ? p. (a) What are the price and quantity consumed in the long-run competitive equilibrium? Draw the
demand and supply curve and indicate the competitive market equilibrium.
(b) Suppose one new rm enters that is dierent from the existing rms. The new rm has a constant
marginal cost of $9 and no xed costs but can produce 10 units (or fewer). What are the price
and the quantity consumed in the long-run competitive equilibrium? Are these the same as in
(a)? Draw the long-run new supply curve, and the demand curve and indicate the competitive
equilibrium on the diagram.
(c) Are positive prots inconsistent with a long-run competitive equilibrium? Recall that in a competitive market equilibrium, sellers are price takers and the market price equals the marginal cost
of the last unit sold.
(d) Identify the marginal cost of the last unit sold in (b). Is it $10 or $9? That is, if demand fell by
one unit, would the new entrant or the other rms reduce output?
(e) How much prot do the less ecient rms in (b) earn?
1 (f) In the long run competitive equilibrium, must the prot of the marginal entrant (the next rm to
enter the market if demand expands, or the next rm to leave the market if demand contracts) be
zero? 2